All posts tagged euro zone economics

Budget deficits are traditionally lagging indicators of what’s going on in the real economy, so it’s no real surprise to see that Germany’s deficit in the first half of the year more than doubled from the same time a year ago. Germany’s economy hit the bottom of a wrenching recession at the end of March 2009 -– something that also helps to explain the positively vibrant 3.7% annual growth rate reported earlier today for the second quarter by the Federal Statistics Office.

It should be good news for all concerned that Germany’s deficit, at 3.5% of gross domestic product, is turning out to be a lot smaller than the 5% forecast by the government at the start of the year. It appears the government will need to borrow less than planned in 2010, making fewer demands on the pool of available capital and leaving more to a private sector that seems increasingly willing to invest. Gross investment rose 4.7% from the first quarter of the year, although that’s exaggerated a bit by the fact that a lot of construction work was put off in the winter due to unusually cold weather. The prospects for a smaller state borrowing requirement have also helped drive down government bond yields to their lowest ever. The German 10-year bund yield hit a new low of 2.17% on Tuesday, and some analysts expect it to dip below 2% within weeks as the market prices in a slowdown in growth, and inflationary pressures, toward the end of the year. Amazingly, even though the deficit is one of Germany’s largest ever, it will be by far the cheapest one to fund.